SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-16999
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Urban Outfitters, Inc.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2003332
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
1809 Walnut Street, Philadelphia, PA 19103
------------------------------------ -----
(Address of principal executive office) (Zip Code)
(215) 564-2313
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(Registrant's telephone number including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Title of Each Class Number of Shares Outstanding
of Common Stock at June 1, 1999
--------------- -----------------------------
Common Shares, par value, $.0001 per share 17,444,541

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1999, filed with the Securities and
Exchange Commission on April 21, 1999.
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
2. Marketable Securities
Marketable securities are classified as follows:
April 30, January 31, April 30,
1999 1999 1998
--------- ----------- ---------
(in thousands)
Current portion
Held-to-maturity .......... $ 7,348 $ 9,206 $10,922
Available-for-sale ........ 2,757 3,826 1,672
------- ------- -------
10,105 13,032 12,594
------- ------- -------
Noncurrent portion
Held-to-maturity .......... 16,299 12,218 11,466
------- ------- -------
Total marketable securities... $26,404 $25,250 $24,060
======= ======= =======
3. Net Income Per Share
The difference between the number of weighted average common shares outstanding
used for basic net income per share and the number used for dilutive net income
per share represents the share effect of dilutive stock options.
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4. Segment Reporting
Urban Outfitters is a national retailer of lifestyle-oriented general
merchandise through 49 stores operating under the retail names "Urban
Outfitters" and "Anthropologie," and through a catalog and website. Sales from
this retail segment account for over 90% of total consolidated sales for the
fiscal year ended January 31, 1999. The remainder is derived from a wholesale
division that manufactures and distributes apparel to the retail segment and to
over 1,300 better specialty stores worldwide.
The Company has aggregated its operations into these two reportable segments
based upon their unique management, customer base and economic characteristics.
Reporting in this format provides management with the financial information
necessary to evaluate the success of the segments and the overall business. The
Company evaluates the performance of the segments based on the net sales and
pre-tax income from operations (excluding intercompany royalty and interest
charges) of the segment. Corporate expenses include expenses incurred in and
directed by the corporate office that are not allocated to segments. The
principal identifiable assets for each operating segment are inventory and fixed
assets. Other assets are comprised primarily of general corporate assets, which
principally consist of cash and cash equivalents, marketable securities and
other assets. Intersegment sales are immaterial. The Company accounts for
intersegment sales and transfers as if the sales and transfers were made to
third parties making similar volume purchases.
Both the retail and wholesale segment are highly diversified. No customer
comprises more than 10% of sales. Foreign operations are immaterial relative to
the overall Company.
Quarter Ending: April 30, 1999 April 30, 1998
-------------- --------------
Operating revenues
Retail operations ...................... $ 52,443 $ 33,921
Wholesale operations ................... 6,186 6,357
Intersegment elimination ............... (638) (895)
-------- --------
Total net sales ........................ $ 57,991 $ 39,383
======== ========
Income from operations
Retail operations ...................... $ 6,040 $ 2,584
Wholesale operations ................... 477 860
-------- --------
Total segment operating income ......... 6,517 3,444
Corporate and other general expenses ... (505) (278)
-------- --------
Total income from operations ........... $ 6,012 $ 3,166
======== ========
Net fixed assets
Retail operations ...................... $ 47,490 $ 30,688
Wholesale operations ................... 986 874
Corporate .............................. 1 1
-------- --------
Total net fixed assets ................. $ 48,477 $ 31,563
======== ========
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Inventory
Retail operations....................... $ 24,280 $ 18,951
Wholesale operations.................... 1,012 2,193
-------- --------
Total inventory......................... $ 25,292 $ 21,144
======== ========
5. Common Stock Purchase and Retirement
In a series of open market transactions during the first quarter, the Company
purchased and retired 371,545 shares of its common stock at a cost of $5.0
million. These purchases were made pursuant to a resolution adopted by the Board
of Directors in 1995 that authorizes the Company to purchase, from time to time,
up to 800,000 shares of the Company's common stock. As of April 30, 1999, up to
261,255 additional shares are authorized for purchase under this resolution.
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PART I
FINANCIAL INFORMATION (continued)

ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
This Securities and Exchange Commission filing is being made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Certain matters contained in this filing may constitute forward-looking
statements. Any one, or all, of the following factors could cause actual
financial results to differ materially from those financial results mentioned in
the forward-looking statements: industry competition factors, unavailability of
suitable retail space for expansion, timing of store openings, difficulty in
predicting and responding to fashion trend shifts, seasonal fluctuations in
gross sales, the departure of one or more key senior managers and other risks
identified in filings with the Securities and Exchange Commission.
The Company opened three new stores during the quarter: two Urban Retail
locations in Burlington, Vermont and Los Angeles, California and one
Anthropologie store in Chestnut Hill, Massachusetts. Management plans to open
approximately eight additional stores during the remainder of the current fiscal
year.
RESULTS OF OPERATIONS
The Company's operating years end on January 31 and include twelve periods
ending on the last day of the calendar month. For example, fiscal year 2000 ("FY
2000") will end on January 31, 2000. This discussion of results of operations
covers the first quarter of FY 2000 and FY 1999.
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The following table sets forth, for the periods indicated, the percentage of the
Company's net sales represented by certain income statement data. The following
discussion should be read in conjunction with the table that follows:
THREE MONTHS ENDED
April 30,
1999 1998
---- ----
Net sales 100.0% 100.0%
Cost of sales, including certain
buying, distribution and occupancy costs 63.0% 64.5%
----- -----
Gross profit 37.0% 35.5%
Selling, general and
administrative expenses 26.6% 27.5%
----- -----
Income from operations 10.4% 8.0%
Other income (expense), net (1.0%) 1.0%
----- -----
Income before income taxes 9.4% 9.0%
Income tax expense 4.3% 3.7%
----- -----
Net income 5.1% 5.3%
===== =====
FIRST QUARTER ENDED APRIL 30, 1999 COMPARED
TO THE FIRST QUARTER ENDED APRIL 30, 1998
Net sales increased during the first quarter ended April 30, 1999 to $58.0
million, up 47 percent from $39.4 million for the same quarter last year. The
$18.6 million increase over the prior year's first quarter was primarily the
result of new and noncomparable stores' sales of $10.1 million, a 17 percent
comparable store sales increase that contributed $5.5 million and Anthropologie
direct response sales (catalog and website) of $3.7 million.
Gross profit as a percentage of sales increased by 1.5 percent during the first
quarter ended April 30, 1999 compared to the same quarter last year. The gross
profit improvement was due to: (1) higher initial markups in the retail segment,
accompanied by lower markdown requirements as a result of strong sales
performance; (2) occupancy cost leveraging based on comparable store sales
increases; and (3) distribution efficiencies. These favorable factors were
offset, in part, by investments in merchandising personnel and a decrease in
Wholesale division margin.
Selling, general and administrative expenses for the quarter ended April 30,
1999 expressed as a percentage of sales decreased to 26.6% compared to 27.5% for
the same quarter last year. The comparable store sales gains and the increase in
catalog sales resulted in leveraging of operating expenses.
Accordingly, operating income for the quarter increased by 90% in dollars
and from 8.0 % of sales in FY 1999 to 10.4% this year.
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The change in other income (expense) is primarily attributable to a required
charge to earnings to recognize a reserve for the Company's portion of operating
losses relating to its investment in MXG media, inc. ("MXG", formerly HMB
Publishing, Inc.). MXG is a development stage company which publishes a
"magalog" and operates a website - www.mXgonline.com - that caters to teenage
girls. Management is pleased with MXG's accelerated marketing efforts and
website development and has advanced additional amounts to facilitate MXG's
expansion. MXG is currently negotiating an additional round of investment with
third parties to fund its growth plans. The implicit valuations by these
potential investors attribute no decline to the value of the Company's
investment. The Company anticipates, however, that the accounting rules
regarding the operating losses of MXG will require additional charges be
recognized by the Company in subsequent periods. The net investment in MXG as of
April 30, 1999 and April 30, 1998 was $4.9 million and $1.4 million,
respectively. In addition, other income (expense) reflects a decrease in
interest income due to decreases in average investable balances and decreased
rates versus the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $14.1 million at April 30, 1999, as compared
to $25.2 million at January 31, 1999 and $23.9 million at April 30, 1998. The
Company's net working capital was $35.8 million at April 30, 1999, as compared
to $47.5 million at January 31, 1999 and $50.0 million at April 30, 1998. The
decrease in cash and cash equivalents on April 30, 1999 from year end reflects
the funding of FY 2000's increased level of capital expenditures (primarily for
new store construction), the increase in inventory for new stores and the
seasonal building of inventory in existing stores. Cash requirements for these
activities, combined with $5.0 million expended to repurchase 371,545 shares of
the Company's common stock and additional investments in MXG, more than offset
cash generated from earnings.
Total inventories at April 30, 1999 increased by 20% versus the comparable
quarter end last year, principally attributable to additional stores. Comparable
store inventories increased by 6%. Catalog inventories increased substantially
over last year's modest test level and wholesale inventories decreased by 46%
due to liquidation of prior season merchandise.
The Company expects that capital expenditures during FY 2000 will be
approximately $25 million. Three stores are currently under construction. The
Company believes that existing cash and investments at April 30, 1999, as well
as cash from future operations, will be sufficient to meet the
Company's cash needs through January 31, 2000.
Accrued expenses and other current liabilities increased to $10.1 million as of
April 30, 1999 from $4.8 million at April 30, 1998. The increase in the
components of accrued expenses and other current liabilities (which includes
accrued compensation and benefits and accrued income taxes) is primarily
attributable to additional stores, the strong comparable store sales performance
and improved profitability.
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The Company has a $16.2 million revolving line of credit available to facilitate
letter of credit transactions and cash advances. As of and during the quarter
ended April 30, 1999, there were no outstanding borrowings. Outstanding letters
of credit totaled $5.7 million, $4.1 million and $6.1 million at April 30, 1999,
January 31, 1999 and April 30, 1998, respectively. The fair value of these
letters of credit is estimated to be the same as the contract values.
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OTHER MATTERS
Outlook
While the Company has exceeded its planned rate of comparable store sales
increases during the first quarter, management's plan for the remainder of the
fiscal year is for more moderate comparable
store sales growth.
Year 2000
The Company does not generally sell products that must be brought into Year 2000
compliance. However, the Company does rely upon many vendors and suppliers for
their products and services. The Company has conducted a comprehensive review of
its computer systems to identify the systems that could be affected by the "Year
2000" issue. The Company has also reviewed and continues to monitor the
implemented changes or planned changes of its major suppliers that management
believes could be affected by the Year 2000 date. Based on the review, the
Company's major information technology systems ("IT") that would be adversely
affected by Year 2000 issues will be upgraded or replaced through the normal
course of business prior to December 31, 1999. Internal resources are being used
in a timely manner to evaluate, modify and test the Company's other systems that
are not scheduled to be upgraded or replaced through the normal course of
business. The Company's core merchandising and financial system upgrade and the
store register system upgrades have been completed, and testing of these
upgrades continues. In addition, the Company is in the process of completing the
inventory and assessment of its non-information technology systems ("non-IT"),
including those with embedded processor chips -- heating, ventilation and air
conditioning systems, elevators, etc. The Company is evaluating key vendor
preparedness by conducting interviews, obtaining compliance representation
letters and, if deemed necessary, conducting comprehensive tests. The Company
expects to complete its Year 2000 compliance evaluation program by June 30,
1999. At this time, management continues to believe that the incremental costs
associated with major system upgrades and/or replacements, as well as internal
efforts to evaluate, modify and test the Company's other systems to ensure Year
2000 compliance, are not expected to be of a material nature to the Company.
There can be no guarantee, however, that the Company's efforts will prevent Year
2000 issues from having a material adverse impact on its results of operations,
financial condition and cash flows. The possible consequences to the Company if
its business partners are not fully Year 2000 compliant (including banking
systems, communications, other public utilities and the transportation industry)
include temporary store closings and delays in the receipt of key merchandise
categories. Accordingly, the Company is in the process of developing contingency
plans to mitigate the potential disruptions that may result from the Year 2000
issue. Such plans may include earlier receipt of key merchandise categories,
preparing alternative merchandise delivery methodologies, securing alternative
suppliers, etc. It is anticipated that these contingency plans to manage
identified IT and non-IT areas of high risk will be completed by June 30, 1999.
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Recent Accounting Pronouncements
The Financial Accounting Standards Board released Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," which is effective for fiscal
years beginning after December 15, 1998. Effective February 1, 1999, the Company
is required to expense as incurred all start-up and organization costs,
including travel, training, recruiting, salaries and other operating costs.
Previously, the Company deferred pre-opening costs until the store opened. The
amounts deferred were then amortized over the lesser of six months or the
remainder of the Company's fiscal year. This accounting change did not have a
material effect on the Company's results or the presentation of comparable
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133") which is required to be adopted in
fiscal years beginning after June 15, 2000. The Company plans to adopt SFAS No.
133 effective February 1, 2001. The Company currently enters into short-term
foreign currency forward exchange contracts to manage exposures related to its
Canadian dollar denominated investments and anticipated cash flow. The amounts
of the contracts and related gains and losses have not been material. The
adoption of SFAS No. 133 is not expected to have a significant effect on the
financial position or results of operations of the Company.
Market Risks
The Company is exposed to the following types of market risks - fluctuations in
the purchase price of merchandise, as well as other goods and services; the
value of foreign currencies in relation to the U.S. dollar; and changes in
interest rates. Due to the Company's inventory turn and its historical ability
to pass through the impact of any generalized changes in its cost of goods to
its customers through pricing adjustments, commodity and other product risks are
not expected to be material.The Company purchases substantially all its
merchandise in U.S. dollars, including a portion of the goods for its stores
located in Canada and the United Kingdom. As explained in the section above on
"Recent Accounting Pronouncements," the market risk is further limited by the
Company's purchase of foreign currency forward exchange contracts.
Since the Company has not been a borrower, its exposure to interest rate
fluctuations is limited to the impact on its marketable securities portfolio.
This exposure is minimized by the limited investment maturities and "put"
options available to the Company. The impact of a hypothetical two percent
increase or decrease in prevailing interest rates would not materially affect
the Company's consolidated financial position or results of operations.
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Seasonality and Quarterly Results
While Urban Outfitters has been profitable in each of its last 37 operating
quarters, its operating results are subject to seasonal fluctuations. The
Company's highest sales levels have historically occurred during the five-month
period from August 1 to December 31 of each year (the "Back-to-School" and
Holiday periods). Sales generated during these periods have traditionally had a
significant impact on the Company's results of operations. Any decreases in
sales for these periods or in the availability of working capital needed in the
months preceding these periods could have a material adverse effect on the
Company's results of operations. The Company's results of operations in any one
fiscal quarter are not necessarily indicative of the results of operations that
can be expected for any other fiscal quarter or for the full fiscal year.
The Company's results of operations may also fluctuate from quarter to quarter
as a result of the amount and timing of expenses incurred in connection with,
and sales contributed by, new stores, store expansions and the integration of
new stores into the operations of the Company or by the size and timing of
mailings of the Company's Anthropologie catalog. Fluctuations in the bookings
and shipments of Wholesale products between quarters can also have positive or
negative effects on earnings during the quarters.
15